Canada dollar falls as central bank forecast to hold 1% rate

The Canadian dollar traded at almost the lowest level this year against its U.S. counterpart as the Bank of Canada is projected to maintain its benchmark interest rate at 1% in a decision tomorrow.

The currency weakened versus the majority of its most-traded peers after a report showed Canadian retail sales slowed in November. Canada’s dollar fell against the yen, trimming a gain this month, after the Bank of Japan said it will conduct open-ended asset purchases starting in 2014, later than estimated.

“We’re a long way from getting back to normal interest rates,” said Aaron Fennell, a futures specialist at Bank of Nova Scotia’s ScotiaMcLeod unit, by phone from Toronto. “If they do start raising rates in Canada, they’re going to do so very cautiously, 25 basis points at a time. They’ll probably do it two times and then lay off for a while to see what happens.”

The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, was little changed at 99.25 cents per U.S. dollar at 1:22 p.m. in Toronto. It reached 99.47 on Jan. 18, the lowest level since Dec. 31. One loonie buys $1.0076.

It fell 0.9% to 89.07 per yen, paring a 2.2% gain this month.

Options Data

Options traders became more bearish on the Canadian dollar. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against the loonie versus contracts to sell, traded as high as 0.92 percentage point, the most since Nov. 27. It averaged 1.5 percentage points during the past 12 months.

Canada’s benchmark 10-year bonds rose, pushing the yield down two basis points, or 0.02 percentage point, to 1.91%. The 2.75% note maturing in June 2022 added 21 cents to C$107.17.

The Bank of Canada will announce further details on Jan. 24 for a Jan. 30 10-year note auction.

The central bank will keep the benchmark interest rate at 1% when it announces its policy decision at 10 a.m. tomorrow, according to the median forecast of 24 economists in a Bloomberg survey. The Bank of Canada has kept its policy interest rate at 1% since September 2010, the longest pause since the 1950s, and has said since April that borrowing costs may rise.